Welcome to my video presentation for Monday, March 15, 2021. For greater details, read my article below.

Stocks hit new highs last week, as optimism over economic growth continued to fuel the post-election rally. An encouraging inflation report and a break from the recent climb in interest rates also drove the market’s record gains.

The U.S. Bureau of Labor Statistics reported last Wednesday that the consumer price index (CPI) increased only 0.4% in February, in line with consensus expectations. The CPI over the past 12 months gained 1.7% year-over-year, also meeting estimates and falling below the Federal Reserve’s standard target of 2%.

Enactment of President Biden’s $1.9 trillion American Rescue Plan cheered Wall Street. U.S. Treasury Secretary Janet Yellen said Sunday that the U.S. could return to full employment in 2022, thanks in large part to the rescue plan.

U.S. and global equities finished the week higher and they’re also in positive territory year to date (see table).

As the number of coronavirus infections and deaths decline and states reopen their economies, we’re witnessing a rotation from growth to value, and from large-caps to small-caps. Market rotation is when money stays in the stock market but moves from one style, sector, asset class, or other attribute to another.

Certain sectors of the economy typically outperform or underperform the broader market, depending on the stage of the economic cycle. Right now, you should bet on economically sensitive stocks that will prosper during the economy’s reopening.

Read This Story: Using Sector ETFs as Tactical Trading Tools

Small-cap stocks, which tend to be economically sensitive, are generally defined as having market valuations of between $300 million and $2 billion. The recent rise of smaller equities strengthens the bullish case, by conveying greater breadth to the rally and reflecting confidence about the economic recovery.

Over the past three months, the small-cap oriented Russell 2000 Index has climbed 23.07% versus 7.53% for the S&P 500 (see chart).

There’s a comfort to investing in large-cap companies with familiar names and products. But the right small-cap stock can lead to outsized portfolio gains.

Mega-cap stocks offer a margin of safety at a cost: meaningful earnings growth is harder to come by for the companies at the top of the food chain. But for small fry, an acquisition or organic expansion can turbocharge earnings and produce big gains for shareholders.

Moreover, many of these small-cap stocks haven’t found their way onto analysts’ radar screens, making it easier to find undervalued names that the market doesn’t understand.

Over the long term, small-cap stocks on average have dramatically outperformed all other types of stocks. Small-cap stocks have surged in recent months on the strength of better-than-expected fourth quarter 2020 earnings results. They probably have further to run, with fiscal stimulus as a major tailwind.

President Biden last Thursday signed his $1.9 trillion stimulus package into law. The plan contains a range of measures, including $59 billion worth of assistance to small companies.

The bill also contains an additional round of direct payments to most Americans, amounting to more than $400 billion. Checks of $1,400 will be sent to individuals making up to $80,000, single parents earning $120,000 or less and couples with household incomes of no more than $160,000. Over the weekend, stimulus checks already started to land in checking accounts. The following infographic provides details about the package:

How should you divvy up your portfolio, to take advantage of market rotation? As economic growth accelerates this year, sectors positioned to outperform include energy, financials, industrials, and consumer discretionary.

As a general rule of thumb, don’t allocate more than 5% to any single sector and avoid placing more than 20% of your portfolio dedicated to sectors. You can use between one and four sectors with 5% allocated to each.

If you’re looking for investments that are immune to economic cycles, consider the methodology of my colleague Jim Fink.

Jim Fink is the chief investment strategist of Velocity Trader, Options For Income, and Jim Fink’s Inner Circle. He’s also a world-renowned options trader.

Jim has devised a proprietary options trading strategy that racks up profits regardless of the pandemic, stock market gyrations, or political turmoil.

Jim’s all-weather trading system makes money in bull, bear or flat markets…during rallies or corrections. To learn Jim’s wealth-building secrets, click here.

John Persinos is the editorial director of Investing Daily. You can reach John at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.